I am often asked for an outline of the home buying process; I decided that the logical place to start was with financing. I encourage you to speak with your realtor in locating a reputable one. A lender with a bad reputation or no rep at all, does not put you in a stronger position.
It is imperative that you get pre-qualified for a home loan. Most sellers will not consider an offer if you can’t back up your ability to close the deal.
Qualifying for a home loan is not much different than obtaining financing for a new car. I would be happy to refer you to the local mortgage lender that I use, or you may wish to use a lender that you have banked or borrowed with before.
If you are relocating to the area and want to use a local lender who will be around at closing time, pre-qualification can be accomplished via email and the web. For help getting this part of the process started, please contact me.
About what mortgage lenders do:
Most mortgage lenders are actually brokers; some also have “in house” underwriting, meaning that they are making the loan themselves. A lender who can fund a loan in house can be a lifesaver should the third party lender fail to come thru (a very rare occurrence).
Your lender will perform the following functions:
Collect your financial information to include a copy of your credit report
Verify your debts and income
Approve you for a home loan based on your current financial situation
Provide you with a Good Faith Estimate for your loan. If you are looking at different types of loans ie: VA vs. Non-Va, you should get a GFE for both. The GFE will also list all closing costs associated with your purchase.
Once you have a home under contract, the lender will order an appraisal, process your loan, and provide loan documents to the title company for the closing.
Be prepared for a possible last minute request for a bank statement, or to pull your credit again before closing….the lending industry has gotten more cautious recently.
Starting the home loan process:
Initially, your lender will ask you to provide some specific information, and for authorization to check your credit. The lender will ascertain that you meet “conforming” loan standards, standards that apply to the entire industry. A borrower who meets conforming standards will qualify for a loan from most mortgage underwriters, or lenders; your loan officer will then find the best deal for your specific needs.
There are numerous loan programs and guarantees. The VA, FHA and HUD offer loan guarantees, these guarantees offer the lender protection and reduce their risk, which in turn makes them more inclined to lend to you.
Your lender can better explain which, if any, program may benefit you. Make sure that you get comparisons, as different loan packages have differing costs.
If you are applying for a VA guaranteed loan, you will need your VA certificate of eligibility. If you are on active duty, you can get this from your PAC or PSB, if you are prior service the local VA, or the Retirement Services Officer (RSO) at a nearby installation can help.
What does pre-qualification mean:
The pre-qualification letter will mean that your offer will be seriously considered by the seller.
To the lender, pre-qualification means that you are qualified for a home loan based on your financial situation at the time that you applied, with the assumption that you have been truthful with the lender. If you go out a buy a new car, or run up a credit card, you may not qualify for as much, and if you were already close to the limit with debt, you may not qualify at all.
Finding the right home:
When searching for a home, it is critical that you establish some upfront criteria, but don’t go overboard. Your criteria should include the obvious such as bedrooms and bathrooms, but don’t put a home out of the running because you would like a double oven or skylights. You may miss your dream home, and double ovens are fairly cheap.
I have a checklist that I can provide you, or you can come up with your own. Using a checklist or some other tool to keep track of the homes that you look at is a must. Your checklist should have a way to track positives and negatives, kind of like a ledger sheet. Having a system that will enable you to quickly compare many homes against each other is the best way to disqualify all but the best, and shorten the list to only the homes that you really like.
Your agent is going to show you the best deals on the market, and you will probably see all of the really good deals in your price range within the first day or two of looking. From there you have to decide weather to make an offer, or to wait for new listings to come on the market…..the supply of homes that fit your wants and abilities are limited.
If you are having difficulty finding the right home, your agent should explore with you weather or not there is a need to increase the price or change requirements (do you really need the 3rd bath or spare bedroom?). Some agents may be uncomfortable doing this, since the customer is always right; but reality may dictate an adjustment in expectations, and your realtor needs to be straight with you.
Making the right offer:
The philosophy, science, and sometimes guesswork of making an offer that will result in the best possible terms for you is dependent on the situation, the following is a list of things to consider when making an offer.
Although there are many homes on the market, the ones that are appealing to you are also appealing to your competition. The appeal may be in the home itself, the price, the location, or any number of other things.
Even in a buyers market, the seller with a desirable property or good price is enjoying a sellers market.
An offer that is too low will always bring a counter offer, often times for more than what the seller would have accepted.
Remember that a used home is a used home. Don’t expect the seller to make it new.
If you are looking at a property, it is probably priced pretty well. You would have disqualified it without going for a look if it wasn’t.
In writing your offer, do everything possible to understand the seller’s motivation. Understanding how motivated they are, and why, can go a long way to making the right offer. Some sellers have short time frames, while some have mortgages that they can’t afford. Any insight you can get into these things can be like money in your pocket.
Consider the sellers emotional state. If the home has obviously received a lot of “customization”, your compliments of the sellers efforts may be all that is needed to take the sting out of a lower than expected offer.
Try not to be critical of the sellers or their home. Be careful of how you verbalize your requests. When asking for repairs or compensation for repairs, use language that won’t antagonize the seller.
The goal in writing your offer is to have it accepted as written, or with few changes, especially in price. Do all that you can to make the seller feel good….they are more likely to give you what you want.
Earnest money is a deposit (not a down payment) on the home. There is no set amount for the earnest money deposit, I generally feel that 1% of the purchase price is very reasonable, less is acceptable.
Your earnest money deposit is a show of your good faith and commitment to the contract. Obviously, the larger the deposit, the stronger your message is to the seller that you are serious.
Negotiations should be minimal if your agent is in tune with the market, and if you put careful consideration into your initial offer. Try to put yourself in the sellers shoes, try to read the situation (with your agents help), and consider what is worth asking for and what is not. Always ask for what is important to you, don’t be frivolous.
One more thing about offer price: If the seller owes more on the home (mortgage, taxes and commissions) than what you are offering, will they be able to accept your offer? Because of market conditions of the past couple of years, many homes are priced at the break-even point. Short Sales are an exception, are priced below what is owed on the home, and may be priced below what they will actually sell for. For more about short sales, read “Offers on Short Sales and Pre-Foreclosures”
Once your offer is accepted:
Once your offer is accepted, your agent should take the ball. He or she will provide a copy of the contract to the title company and your lender for processing. Inspection(s) should be scheduled immediately, and your earnest money will be deposited to either your realtors trust account or, preferably in my opinion, the title company trust account.
I really encourage my clients to have a home inspection performed by an experienced, licensed home inspector. There are several inspectors that I like to use; all have had experience building and remodeling homes, have been successful contractors, and are bonded and insured.
A home inspection is like added insurance. For the $350-400 spent, you receive piece of mind and no surprises after moving in. Home inspectors are typically paid at the time of the inspection….you don’t want him or her to “fluff” the inspection, hoping to make sure that you close and that he gets paid.
The inspection must be conducted within 10 days of acceptance of the offer unless otherwise specified in the contract. Additionally, if conditions are discovered during the inspection that requires further evaluation, 5 days is provided for additional inspections in the contract. If additional time is needed it can be negotiated with the seller.
The results of the inspection will be reviewed by you and I as a team. At this point we have three options.
Withdrawal the offer based on dissatisfaction with the results of the inspection.
Request that the seller make repairs or offer a cash credit for repairs and corrections.
Accept the condition of the property and proceed to closing.
* Unsatisfactory inspection results may also provide the basis for re-negotiating other parts of the contract, such as the price.
Your lender, as part of processing your loan, will order an appraisal of the property. The lender must order the appraisal, and with certain types of loans the appraisal may be ordered by a third party to insure impartiality.
The fee for the appraisal will be collected at the closing. This fee is part of what is considered your closing costs.
Home owners insurance
Once you have a contract to purchase your home, you will need to contact your insurance agent for your homeowners insurance. Usually, having your insurance agent contact the lender is sufficient. Your agent will provide an insurance binder for the property that will be required by the lender prior to closing.
Your lender should include a monthly amount for homeowners insurance in the good faith estimate, several months of insurance premium is often included as part of your closing costs.
The title company and escrow officer:
The title company and escrow officer (usually an employee of the title company), perform the following functions:
Hold funds, such as earnest money, in a trust account until closing.
Research the Title; this is verification that there are no liens against the property, that no other person or party has an interest in the property, and that you will be able to take full ownership and rights to the property
Issue title insurance; should a claim on the property arise in the future you have insurance to protect you from loss. This is always a requirement by the lender.
The escrow officer is also known as a Limited Practice Officer (LPO), licensed to practice specific legal functions in the state of Washington. The LPO will gather the title documents, the loan documents, and the funds to close. Once all is in order, he or she will distribute funds to the necessary parties, transfer the deed for the property to you, and record the transaction with the county recorder.
What defines “Closing”:
The Paper Trail
Loan documents received from the lender by the title company
LPO prepares the deed for signature, as well as the loan documents and seller related documents.
Buyer and seller sign documents, usually at separate times.
LPO sends the document packet to the lender for review (usually less than one business day).
Lender approves the documents, and releases funds, authorizing the LPO to close the transaction.
The LPO has the necessary documents recorded in the public record, and transfers the deed or title.
Congratulations, the home is yours!
When can you move in?
Many people feel that the home is theirs as soon as they have signed the closing documents. As you can see in the previous paragraph, there is a bit more to it.
The answer is “Once the Deed is recorded with the county recorder and the tax assessor is paid”
Taking ownership; utilities other obligations:
Upon closing it is your obligation as the new homeowner to have all utilities transferred to your name. You will also need to provide change of address information to the post office, and I recommend a note in the mailbox informing the mailman of your arrival.
I also encourage you to become an active member of the community. If you do so as soon and you move in, it will happen………if you wait, it won’t. Learn about the homeowner’s assn., attend a meeting, and be pro-active both in protecting your rights, and in voting for rules that protect your neighborhood and its value.
Should you use a Realtor?
I don’t know why a buyer would not use a realtor. Buyer’s agents are real estate professionals who work exclusively for the buyer. The buyer’s agent is there to protect your interests, and insure that you get the best home possible, at the best price. The greatest thing about this relationship is that it costs you nothing. Sellers pay real estate commissions, buyers do not. A home buyer using an experienced realtor is receiving free market knowledge, expertise in executing a real estate transaction, and exposure to the widest possible number of homes on the market. Sellers pay the cost because they want buyers to be qualified by an agent; and because they want the buyer to have experienced representation that will result in a sale.
When you retain a realtor to represent you, that realtor is legally obligated to serve your best interests. Beyond legal obligations, realtors must work in the community, and rely on satisfied clients to promote their business. Real Estate agents with dissatisfied customers don’t typically do well or last long in this business.